View more on these topics

How to get started with ethical investing

economical investmentEthical investing is a hot topic, but where is the best place to start creating a responsible portfolio?

Ahead of Good Money Week later this month (29 September to 5 October), which aims to show there are sustainable and ethical options when it comes to investments and pensions, Money Marketing speaks to three experts, asking where to begin to create more responsible portfolios.

Where should investors start when creating their own ethical portfolios?

Ketan Patel, co-manager of the Amity UK fund, EdenTree Investment Management: Ethical investors need to be clear about what areas of the market they want to avoid or minimise their exposure to, and often this is based on what individuals are passionate about.

Traditionally this has meant avoiding the so-called “sin stocks” but increasingly this has moved into other areas including human rights and climate change.

The difficulty is then finding an investment manager or fund that is aligned to what they want to achieve with their investments.

Not all ethical funds are equal and investors should be focused on what criteria are employed by investment managers. Some focus on exclusion, while others have developed positive screens.

Peter Michaelis, head of sustainable investment, Liontrust: The traditional approach of ethical investing is to avoid certain industries because of the negative effects of their products, with the classic examples being tobacco firms and producers of weapons.

There are other, arguably more interesting, investment approaches, however. One is to invest in sustainable themes, which can be referred to as positive screening because the funds focus on what they do want to invest in.

Funds may concentrate on single investment themes such as environmental technology, renewable energy or water. Others have multiple sustainability themes that can include healthcare, resource efficiency and education.

How advisers can capitalise on impact investing

Lewis Grant, senior portfolio manager, Hermes Global Equities: Investors should be careful of accepting pre-packaged “ethical” solutions since there is no universal definition of what is ethical: this definition should be made by the investor or asset owner.

Are there any particular asset classes best suited to ethical investing?

Patel: The last two decades have seen a surge in fund launches covering fixed interest, equity and property. Investors are now able to build a diverse ethical investment portfolio covering all geographies and asset classes.

Grant: Ethics, sustainability and responsibility are important ideas across investment classes and time horizons. There are perhaps more options available for ethical investors in public equities but that does not mean it is not suitable for real estate or credit investments.

The investment community has realised this and we see an increased focus on responsibility across the entire investment spectrum.

Can you really outperform non-ethical equivalent funds or should new investors accept returns may not be as high?

Grant: The classical view is that by excluding companies from the investment universe, the expected return must decrease. However,
our approach is not simply focused on exclusions.

Instead, we favour companies that recognise the importance of acting responsibly to all their stakeholders, firms with sustainable product offerings and business models, and those addressing the risk and opportunity of environmental, social and governance considerations.

How to start using investment trusts

Where possible, we prefer engaging with companies to address their unethical or unsustainable practices rather than simply divesting. Successful engagements reduce risks to shareholders, unlock value and benefit wider society.

Michaelis: We have always believed there is no trade-off between investing in companies doing good and delivering good investment returns. Indeed, we believe companies producing goods and services that have a positive impact on people and our planet have a competitive advantage that is often overlooked.

We believe that a key driver of growing appetite for sustainable investing is the increasing realisation that investors do not need to sacrifice financial returns to meet their values.

Patel: The assertion that investors would be forced to give up some performance in order to be ethical has been well and truly dispatched, with plenty of studies showing that ethical investments can perform just as well as non-screened portfolios.

As with all active investments, choosing an experienced investment manager who has a clearly defined strategy that has delivered for their clients over the long term is imperative.

What do you constitute as “ethical” within your funds?

Patel: As a term, “ethical” has its roots in faith-based investing that typically sees investors avoid areas of the market which are viewed as having a negative impact on society.

We prefer our socially responsible investing approach, which not only incorporates the screening out of negative areas of the market but actively looks to “screen in” firms making a positive difference to society and the environments in which they operate.

The negative screen is at the core of the investment process but it is only one part of the toolkit that is available to ethical investors. We feel that positive screening also has a critical role to play for ethical investors, leading to better risk management and greater
alpha generation.

How to pick a multi-asset fund

Michaelis: Stocks in our portfolios exhibit three characteristics: excellent management and core products or services that are making a positive contribution to society; strong growth prospects; and a business model that enables them to grow profitably from these trends and generate competitive returns.

Well-run companies whose products and operations capitalise on transformative changes can benefit financially. We believe that identifying these powerful trends and investing in exposed companies can make for attractive and sustainable investments.

Grant: A responsible investor needs to do more than simply not act irresponsibly and our responsibilities as investors do not stop with a decision to buy or sell a stock. Instead, we must act as engaged owners of the companies in which we are invested and the assets that we manage.

We systematically favour companies with good or improving environmental, social and governance characteristics, while avoiding those with exposure to unsustainable business areas such as tobacco or controversial weapons, or who are breaching global norms (utilising child labour, for example).



The FCA’s uphill fight to end phoenixing

Advisers are calling on the FCA to step up the pressure on so-called “phoenix” firms as new Money Marketing research suggests the practice is still commonplace in the advice market, and appears to have been employed by some firms that have been sanctioned over defined benefit transfers. Phoenixing is the term given to the practice […]


SJP investigates independence claims made by adviser

Restricted national firm St James’s Place is looking into why one of its partners told a prospective client he provides independent advice. In an email to a business owner seen by Money Marketing, an SJP adviser offers his advice services, and states he has a long history of being an independent financial planner. He states he has helped similar […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm